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question 62

Essay

Use the information for the question(s)below.
Iota Industries is an all-equity firm with 50 million shares outstanding.Iota has $200 million in cash and expects future free cash flows of $75 million per year.Management plans to use the cash to expand the firm's operations,which in turn will increase future free cash flows by 12%.Iota's cost of capital is 10% and assume that capital markets are perfect.
-Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future free cash flows by 30%.If you were advising the board,what course of action would you recommend,investing the $200 million in an expansion project that will raise future free cash flows by 30% or use the $200 million to repurchase shares? Which provides the higher stock price?

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Definitions:

Biofilm

A biofilm is a complex aggregation of microorganisms growing on a solid substrate, often encased in a self-produced matrix of extracellular polymeric substances.

Multicellular Organism

Organism composed of interdependent cells that vary in their structure and function.

Pilus

A protein filament that projects from the surface of some prokaryotic cells.

Aerobic Respiration

A process in which organisms convert oxygen and glucose into energy, carbon dioxide, and water.